KBRA releases research on the fall in CMBS subordinate debt.

While CMBS conduits are composed of first-lien loan collateral, they typically have exposure to collateral where subordinate indebtedness held outside the trust is in place or future amounts are permitted. Such indebtedness in KBRA-rated CMBS conduits has been declining since 2020, when it peaked at $8.8 billion. With the expectation that interest rates will stay higher for longer, it appears that lenders became more cautious in full-year (FY) 2023, as the amount of subordinate debt fell below the $1 billion threshold. This was the first FY that this occurred since we began formally tracking these metrics in early 2012. The recent FY low coincides with trends in both in-trust and all-in KBRA loan-to-value (KLTV) metrics, which reached their lowest levels in over a decade. From 2012 through 2023, these KLTVs were 96.3% and 102.4% on average, respectively, with the latter including additional subordinate indebtedness. For year-to-date (YTD) 2024, the figures were even lower, at 86.8% and 88%, respectively.

Key Takeaways

• The number of loans (22) with subordinate debt in 2023 was the lowest for any vintage year.
• Total subordinate debt declined to $847 million in 2023 from $8.8 billion in 2020.
• All-in KLTV has been on a fairly steady decline since 2015, reflecting falling subordinate debt levels.
• In 2023, all-in KLTV fell to 90%, the lowest for any FY vintage.
• Office—which has the highest percentage of subordinate debt by loan count on average since 2012, at 9.3%—was at 0% as of YTD 2024.

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About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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